11/7 As we have long said, whenever the market crashes we will be there. So beware until the ides of November. We are rather proud of our call for Black Monday II, and were well positioned today November 7 with short instruments:
In reference to Michael Brush's November 5th article in MONEY Daily: The top 10 things that could tank the market I naturally appreciate being reason number 1:
#1 Market-timer Henry Weingarten ... he's done it twice already But just so Money readers don't think I am just a doomsayer, do please mention that in addition to calling Black Monday II, our precise TO THE MINUTE CALL for the October 28th 337 point recovery, the biggest DIJA gain in Wall Street History: WALL STREET, NEXT WEEK Subscribers were alerted to:
"BUY BUY BUY: BEFORE 10:30!!!"
NOTE: AT 10:30 EXACTLY massive futures buying caused the price of the December S & P futures contract to jump a massive 35 points over SP Cash and at 10:35 IBM announced a $3.5B share buy back!!!!! PS Did I forget to mention we suggested buying IBM as our stock of choice that day :)
Wednesday, November 5, 1997 8:43 p.m. EST
THE TOP 10 THINGS THAT COULD TANK THE MARKET
By Michael Brush
Feeling pretty comfy now that the markets have had a couple of quiet and even modestly positive trading
days? You shouldn't. Whether or not you believe stocks are overvalued right now, a lot of other investors do -- and that makes markets around the globe prone to herd behavior and full-blown panic attacks like the one that swept through last week.
With that in mind, and with the Halloween season and several spooky movies still fresh in memory, we
queried some of the best market analysts around to develop a list of the top ten events that could tank
this market. Here, with apologies to David Letterman, are the doomsday scenarios they came up with, more or less in reverse order of actual probability:
#10 War. Hey, we've been down that road once recently with Iraq's Sadam Hussein -- and the Middle East isn't the only trouble spot, as several analysts pointed out. "If North Korea pulls the trigger and launches an attack on South Korea, that would provoke a dramatic market decline," says John Cleland, the chief investment strategist at Security Benefit Group Inc., Topeka, Kansas.
#9 Oil Price Shock. In addition to tensions in the Middle East, watch out for a pick up in growth in the
developed countries that would cause an increase in the demand for energy, says Leila Heckman, of Smith
Barney. That could create shortages just as severe as any cutback in supply.
#8 Economic Downturn. There remains the chance that the U.S. economy could take a sharp dip in 1998, warns Hugh Johnson, market strategist for First Albany Corp. Look for early warnings like a surge in unemployment insurance claims, or sharp declines in the purchasing managers' index or the consumer confidence levels reported by the University of Michigan.
#7 Breakdown in world trade. "One thing that has kept inflation low has been globalization," notes Vernon Winters, the chief investment officer of Mellon Private Asset Management. "The low-wage economies have been thrust on the developed world." Rising trade barriers would not only shut down access to these markets, but remove some of that downward pressure on prices -- thus eliminating a key factor that has held inflation at bay. Beware, for example, of a delay in approval of the "fast track" trade negotiations in Washington, D.C., or a further deterioration in the recent shaky trade relations with Japan. Also keep in mind that when currencies run into trouble, as many Asian and Latin American currencies have lately, people start pointing the finger at trade and apply pressure on politicians to limit the exchange of goods.
#6 Deflation. It may seem odd that, with all the fuss about inflation, people could be worried that prices
might start going _down_ rather than up. But that worry is real. The reason: Downward price pressure
from Southeast Asia. Lower prices may sound great to shoppers, but for companies, they hammer earnings. Now keep in mind that many reputable economists laugh at the notion that deflation -- last seen here during the Depression -- could recur today. But any sign that prices really _are_ headed down could seriously spook the markets. Here's one scenario, says Cleland:
Problems in Southeast Asia worsen and spark a recession in Japan, or cause a series of beggar-thy-
neighbor devaluations in the region. Further downward price pressure there on finished products pulls prices down elsewhere in the world, and deflation is loosed from Pandora's box.
#5 Inflation. Okay, we said this was a doomsday list, right? And Federal Reserve Board Chairman Alan
Greenspan has emphasized several times that he is most worried about wage pressure forcing a return to higher prices. But First Albany's Johnson points out that wage pressure is already here, and threatening to
create consumer inflation. "That would stir worries about Federal Reserve policy, and that would be
surprising particularly after what has happened in Asia," says Johnson. Few people actually believe the
Fed will raise interest rates soon, given the deflationary effect of the Asian events. But growth
remains strong in the U.S., and signs that it is picking up could put interest rate fears back in view.
#4 Profit margin erosion. "To me, this may be the biggest problem," says Winters. "Companies have not
been able to raise prices, and the events in Southeast Asia mean it is unlikely they are going to get any
pricing power in the future." Instead, firms have been boosting margins by cutting costs and taking advantage of things like lower tax and interest rates. "But you can't keep cutting costs forever," says Winters. Yes, spending on technology has improved productivity. But companies may start to feel the pinch as they divert more of their technology budgets to the so-called "Year 2000" problem. Of course, profit margin erosion would take awhile to develop. But any sign that we are headed down that track would frighten investors. "Look out for warnings from a major earnings momentum icon
that will have problems in the fourth quarter and dimmer prospects for 1998," says Michael Metz, the
chief market strategist for Oppenheimer.
#3 Currency crisis. The storm may not have passed. Domestic inflation and trade-account deficits -- both
of which weaken currencies -- have prompted economists to put Korea, Brazil, Poland and others on the watch list. If those currencies devalue, that could send another shock wave through Wall Street.
#2 More fallout from Southeast Asia. After all, no one is quite sure how bad things will get. "You are
likely to see other companies like Fluor announce that revenues or earnings will be lower because of what is happening in that part of the world," says Johnson. Watch for problems in banks with exposure to the
region, especially Japanese banks, and in particular: Sanwa, Sumitomo, Fuji, and Dai-ichi Kangyo, he says. Or keep an eye on Japanese bank indexes for early signs that things are getting worse. On a broader
scale, Japanese exposure to Southeast Asian economic problems -- through trade and bank loans -- could
spell trouble for that country, points out Neil Hokanson, president of Hokanson Capital Management in
Encinitas, Calif. That would be bad for U.S. companies because Japan remains a major U.S. trading partner. So any sign that Japan is slipping into recession because of problems in Southeast Asia could spark another selloff in the U.S.
#1 Market-timer Henry Weingarten ... he's done it twice already Something completely different. So what's really likely to spook the market? Heck, we don't know for
sure -- and neither do the analysts we talked to. The world of financial affairs is too complicated to
foresee every event, and so the actual catastrophe that -- maybe inevitably -- drives this market down is
apt to be missing even from a comprehensive disaster list like this one. Consider, says Winters, the effect
on the markets of something as tragic as Alan Greenspan getting hit by a bus. So our closing thought
is that we hope the Fed chief, and all readers of this column, will continue to look both ways when they step off that curb!
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